How Congress can make solid strides in drug pricing reform

The Food and Drug Administration recently approved a medicine with the highest price ever on record at $2.1 million. It is emblematic of a broader trend in pharmaceuticals. Drug prices have been rising for years, and it is taking a toll. Nearly three in every 10 adults in the United States in the last year did not take their medicines as prescribed because of the costs.

To address the problem, we need first to understand it. The pricing problem stems not from how much pharmaceutical research costs, though it is of course costly. Rather, it is driven by patents and similar exclusive rights that are granted by the government. Patents protect companies from competition and let them price medicines as they wish. The pharmaceutical industry has also lobbied for and received other protections, including the infamous rule that the government may not negotiate the prices of medicines for the Medicare Part D program.

If Congress is serious about drug price reform, Medicare is a good place to start. A full 90 percent of Democrats and 80 percent of Republicans want the government to negotiate prices for the program. It accounts for around 30 percent of overall retail expenditures on drugs, and a workable remedy here could be expanded to other payers. Companies claim that any measure to curb drug prices will undermine innovation. But ordinary people understand that medicines only work if people can afford them.

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Our current innovation system is also far from ideal. Companies tend to chase low hanging fruit to minimize their risk, often bringing to market slightly different forms of existing drugs or other drugs with minimal benefits. To make them profitable, companies then invest heavily in advertising. On average, the drug companies spend about twice on marketing that what they spend on research and development, a clear misalignment of incentives. Negotiating drug prices is the only way to ensure patients can afford their medicines, given the background laws that protect companies from competition. But how can we protect the interests of patients when it comes to both innovation and affordability?

First, we must pay fairly. We should indeed pay more for better medicines to direct companies toward real breakthroughs and away from products with minimal value. Companies do take risks when they make substantial investments in drug development. They also earn revenues around the world and benefit enormously from their taxpayer subsidies and research investments. A fair price must take all this into account, so that we are not paying prices far in excess of what was needed to get the drug to market. Finally, a strong approach will be both sustainable and scalable. Instead of shortcuts, like using the lower drug prices paid in European countries as a benchmark, we should build our own capacity to define fair drug prices.

Congress must also ensure companies cannot hold patients hostage. In the United Kingdom, when the government balked at the $133,000 annual price for a cystic fibrosis drug, the company chose to withhold the drug rather than lower its price. This is rare, but it can be avoided. The central source of scarcity in pharmaceuticals is a government granted monopoly. Governments can, as British patients are now demanding be done in that case, waive the right. This allows other companies to make the drug and provides fair compensation along the way. It may sound extreme, but the United States has always had this right, and has used it in the past to buy antibiotics for the military. When we grant monopolies, we also rightly reserve the option to bring back competition if monopolies are abused.

Finally, the right approach will be comprehensive. Congress can reach much of Medicare spending by tackling just a few dozen drugs. But if it stops there, it will only solve a portion of the problem and will also give companies incentives to game the system. One major proposal on the table right now would do all of these things, and has gained the support of more than 120 Democrats in the House. The Medicare Negotiation and Competitive Licensing Act would require the Department of Health and Human Services to negotiate for the Medicare prices for all drugs, using research and development costs and clinical effectiveness as key factors in the fair price. The bill would also give the secretary a stick big enough that the government should rarely have to use it by allowing the agency to purchase drugs competitively if the company does not agree to the price.